WASHINGTON: The US Supreme Court began hearing arguments on Wednesday in an attempt by Facebook’s Meta to throw out a federal securities fraud lawsuit brought by shareholders who accused the social media platform of misleading them with regarding the misuse of user data.

Facebook has appealed a lower court’s decision allowing the 2018 class action brought by Amalgamated Bank to continue. It is one of two cases brought before them this month — the other involving artificial intelligence chip maker Nvidia — that could result in rulings that make it harder for private litigants to hold companies accountable for alleged securities fraud.

Arguments were ongoing.

The plaintiffs accused Facebook of misleading investors by violating the Securities Exchange Act, a 1934 federal law that requires publicly traded companies to disclose their business risks. They alleged that the company illegally withheld information from investors about a 2015 data breach involving British political consulting firm Cambridge Analytica that affected more than 30 million Facebook users.

Conservative Justice Clarence Thomas pressed Kannon Shanmugam, Facebook’s lawyer, to say whether the company’s risk statement is misleading.

“The problem is that the reasonable person could look at the statement and assume that because it’s only talking about the future probabilities of this harm or this event occurring, that it never happened,” Thomas said.

“Why couldn’t someone read this and assume it never happened?” asked Thomas.

Shanmugam replied: “We do not believe that a reasonable person would draw that inference from a statement of this type. Where a statement says ‘if something happens, harm may result’ – I don’t think it is a necessary premise of that statement that the event never happened.”

Facebook shares fell following media reports in 2018 that Cambridge Analytica used improperly harvested Facebook user data in connection with Donald Trump’s successful US presidential campaign in 2016. The suit seeks unspecified monetary damages, in part to recover lost value of Facebook shares held by investors. .

At issue is whether Facebook broke the law when it failed to detail the earlier data breach in subsequent business risk disclosures and instead presented the risk of such incidents as purely hypothetical.

Facebook argued in a Supreme Court brief that it is not required to disclose that the warned risk has already materialized because “a reasonable investor” would understand the risk disclosures as forward-looking statements.

“When we think about these questions, we’re not just looking for outright lies or misrepresentations,” liberal Justice Elena Kagan told Shanmugam. “We also look for misleading statements or misleading omissions.”

U.S. District Judge Edward Davila dismissed the lawsuit in 2021, but the 9th U.S. Circuit Court of Appeals in San Francisco, in a 2-1 ruling, revived it in 2023.

“The issue is that Facebook represented the risk of improper access to or disclosure of Facebook users’ data as purely hypothetical when that exact risk had already occurred,” Judge Margaret McKeown wrote in the 9th Circuit decision.

A decision from the Supreme Court is expected by the end of June.

The Cambridge Analytica data breach prompted US government investigations into Facebook’s privacy practices, various lawsuits and a US Congressional hearing where Meta CEO Mark Zuckerberg was grilled by lawmakers.

In 2019, the US Securities and Exchange Commission brought an enforcement action against Facebook in the matter, which the company settled for $100 million. Facebook paid a separate $5 billion penalty to the US Federal Trade Commission over the Cambridge Analytica issue.

On November 13, the Supreme Court is set to hear arguments in Nvidia’s similar appeal to avoid a securities class action that accuses it of misleading investors about how much of its sales went to the volatile cryptocurrency industry.

In previous rulings, the Supreme Court limited the authority of the SEC, the federal agency that controls securities fraud. Its rulings in the Facebook and Nvidia cases could now make it harder for private litigants to hold companies accountable for such behavior.